Where has the money gone?

Questions are being asked about how quickly Bell Pottinger has fallen into administration.

The agency, which was expelled from the Public Relations and Consultants Association on Tuesday as a result of its work on behalf of Oakbay Capital, the investment arm of the controversial South African-based Gupta family, is expected to file for administration on Monday after a string of high profile clients quit the business. Its staff have also been informed that they may not be paid in September, and are unlikely to receive redundancy packages.

But financial observers question why the client defections should lead to such a swift demise. 'These are cash generative businesses,' said one. 'Even if a client resigns, they are obliged to serve their notice period which, in most cases, is between three and six months. There should be money in the bank.'

As a limited liability partnership, Bell Pottinger also collected tax from its 55 partners to be paid to HMRC as it fell due. These partners now believe that they will be personally liable for their own tax payments - an unexpected financial obligation that may cripple some individuals - and are puzzled as to where their payments on account have gone.

Bell Pottinger's most recent filing at Companies House shows that the agency generated annual revenues of £33 million in the year to December 2015. After deducting cost of sales, Bell Pottinger made a gross profit of £27.9 million. With operating expenses of £16.9 million, this suggests the business generated a margin of almost 40 per cent. 'That's very hefty,' said one observer. 'With a margin like that, I would have thought Bell Pottinger could have withstood a storm for at least several months. The industry average is around 20 per cent, with a handful of agencies generating 30 per cent.'

Another added: 'What are the costs of a PR business? Salaries and property (lease)? Any sensible business would have a cushion in the bank that would cover those costs for at least two or three months so that, in the event that every client left or the business went into a lull, people and bills could still be paid.'

As of December 2015, Bell Pottinger had £2.2 million cash in the bank, and a net book value of £1.44 million.

Bell Pottinger is not due to file its 2016 accounts until September 30, which may provide further insight into its current financial status. Those accounts will cover the payment made to Lord Bell when he was ejected as chairman of the business in August 2016. It is understood that he accepted a payment of £1.10 per share for his stake, just six years after the Bell Pottinger management team conducted a buyout from Chime Communications, which valued the business at £1 per share. (Chime Communications recently returned its 25.5 per cent stake to the limited partnership, and has written down the value of its investment to zero.)

Some observers believe, however, that filing for administration was inevitable after Bell Pottinger's chairman Mark Smith appointed BDO to explore options for the business. Former chief executive James Henderson and his fiance Heather Kerzner own 37 per cent which made a trade sale unlikely, and there was uncertainty as to which employees would remain with the agency. 'Everyone is circling,' said one agency boss. 'We are all looking to pick off the talent. The value of any PR agency is in its people.'

The loss of client revenues coupled with the loss of key employees, with their loyal clients, meant that, looking to the future, BDO likely calculated that the business would be financially insolvent, and was legally compelled to put the business into administration. 'Even if that is true, why can't they pay staff this month? Where is the money?'